Earnings per share (EPS)

Posted in Finance, Accounting and Economics Terms, Total Reads: 882
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Definition: Earnings per share (EPS)

It is the return which a shareholder earns on every share held. It is denoted as:

Net income after tax available for equity share holders/ Outstanding equity shares throughout the year

Net income available for equity share holders is founded out by deducting preference dividend from the Profit after Tax (PAT)

The outstanding equity shares throughout the year are the weighted average of the shares outstanding during the year and the treasury stock is deducted from it.

Refer to the example below to calculate EPS

Revenues

1000000

Cost of goods sold (COGS)

600000

Interest

100000

Profit before Taxes

300000

Taxes (@40%)

120000

Profit after taxes

180000

Preferred dividends

50000

Net income available to common shareholders

130000

No of outstanding shares

100000

EPS

1.3

The EPS should be as high as possible such that the dividends can be paid to the equity shareholders out of the EPS (or) the earnings can be reinvested for the future growth.

Higher the EPS, higher would be the market value as market value is generally denoted as EPS* P/V. Here if P/V is fixed, then increase in share price would be because of high EPS.



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